There’s an easy way to write off the cost of computers, phones, and other modestly-priced capital equipment. Usually, when you buy an item, you have to capitalize the cost, which means adding it to your balance sheet, and then taking depreciation (an annual allowance) over a number of years. This is so regardless of the cost of an item. But instead of doing this, the IRS has created a de minimis safe harbor that allows small businesses to deduct up to $2,500 per invoice (or per item as substantiated by invoice).
Expensing Versus Bonus Depreciation?
At present there are two other ways in which to write off the cost of items in the year they’re bought and placed in service rather than having to depreciate the cost over a number of years:
- Section 179 deduction, referred to as first-year-expensing (up to $1,020,000 in 2019; $1,040,000 in 2020).
- Bonus depreciation for 100% of the cost in 2019 and 2020.
The law allows you to write off the cost in the first year using either of these options. So why use the de minimis safe harbor? After all, any of these write-off options produces the same tax result. You get a full deduction for the cost of equipment in the first year. Well, if you buy a lot of low-cost items, using the de minims safe harbor rule simplifies recordkeeping considerably. For example, say you own a small motel and buy a new iron costing $25 (costs for hotel/motel-use irons range from about $9 to $40) for each of your 40 rooms. Instead of keeping financial records of these 40 capital expenditures, you can elect to deduct $1,000 ($25 x 40) under the de minimis rule and avoid this recordkeeping.
What You Need to Do
In order to use the de minimis safe harbor, be sure you follow IRS requirements.
Use of the de minimis safe harbor must be consistent with how you treat items on your books and records. You don’t need a written accounting procedure (this requirement only applies to large companies with applicable financial statements such as SEC filings or audited financial statements), but you do need to be consistent. The items are not assets on your balance sheet.
Attach an election statement to a timely filed income tax return. Look for the statement entitled “Section 1.263(a)-1(f) de minimis safe harbor election.” The statement must include your name and your taxpayer identification number. It should also contain the statement that you’re making the de minimis safe harbor election.
The IRS doesn’t treat using the de minimis safe harbor election as a change in accounting method. So you don’t need to file Form 3115; only your personal statement attached to the return is required.